Monday, March 2, 2009

David Francis: Obama faces larger problems than Social Security shortfalls

David Francis of the Christian Science Monitor
weighs in on Social Security reform:

Toward the end of his address to Congress last Tuesday, President Obama spoke of beginning a conversation on how to reform the Social Security program.

Such a suggestion makes Henry Aaron, a veteran analyst at the centrist Brookings Institution in Washington a bit edgy. Sure, he says, it's desirable to pay attention to Social Security, but "in the right way. It's better to do nothing than the wrong thing."

Obama spoke of Social Security right after calling for "comprehensive healthcare reform." Medicare and Medicaid are in far worse financial shape than Social Security. The nation's primary pension system could continue providing full benefits for decades to retirees and the handicapped without running short of money.

Economist Aaron worries that some Democrats will not be tough enough in bargaining with conservatives over Social Security changes if a bill comes before Congress. If that were to happen, the final bill could end up with unnecessary benefit reductions, he says.

Here's one point that's worth a little comment:

Benefits could be made considerably more generous with a relatively small increase in the payroll tax, reckons Bernard Wasow, an economist at the Century Foundation. "I don't know if popular opinion would cotton to that," he says.

Um, well, since the program is pay-as-you-go, that means that a dollar of benefit increases requires a dollar of tax increases. Put another way, if we want to increase benefits by a given percentage we also need to increase total taxes by that same amount. So I'm not sure how "considerably more generous" gibes with "relatively small increase in the payroll tax." I suspect these are, shall we way, weighted averages: any increase in taxes counts less than the increase in government spending it would finance.


Bruce Webb said...

Well I suppose we could ask the Trustees to tell us what percentage of immediate increase in payroll would be required to fund full scheduled benefits over the 75 year horizon or alternately by what percentage payroll would have to be increased if we waited until depletion. (Oh wait! They already did!)

Or we could vaguely talk about benefit increases requiring one for one increases in taxation without considering issues of real growth in productivity and real wages going forwards. Or interest effects via compounding. Because numbers just confuse people I guess.

But if we had to use numbers it would be an immediate fix 1.7% of payroll. For the median household earning $50,000 a total of $850, presumedly $425 from the employer and $425 from the earners. Even if we assume the entire real incidence falls on the employee we are talking about $2.32 a day. Seems like a "relatively small increase" to me. Now if Wasow is talking a Galbraith style increase in current benefit then the offsets get more direct. But in the context of Social Security as normally discussed with 'sustainable solvency' and 'intergenerational equity' the cost of the fix really is pretty minor compared to the benefit preservation after 2041.

Andrew G. Biggs said...

Bruce, Not sure what you're getting at. You've got a lot of accusations of dishonesty, but nothing that really challenges the basic point. The math is what it is - a benefit dollar is generated by a tax dollar so it's hard to call one dollar large and the other dollar small, given that they're the same dollar.

If we raise taxes by $2.32 per day and we have a worker-beneficiary ratio of 2-to-1, that means we raise benefits by $4.64 per day. Would people want to pay that smaller tax increase all their lives to receive the larger benefit increase later? Maybe, but nothing prevents them from putting their $2.32 per day in the bank and collecting the larger amount in retirement.

William Larsen said...

It is pretty simple how to calculate the required pay-as-go payroll tax you need if you do not change the retirement age, benefit formula or payroll tax. It is pretty exact.

A true pay-as-go program has no trust fund. As I have written many times, the number of workers entering the work force over the next 18 years is pretty much set in stone (the babies who will enter the work force have already been born). The same is true for beneficiaries. We know pretty accurately the total beneficiaries by cohort over the next 67 years.

This means we know the potential worker to beneficiary ratio as well for each year.

For each beneficiary receiving an average OASI benefit, we have a known number of potential workers. The benefit is based on the Average Indexed Wage. The targeted OASI benefit is 42% of average indexed wages. This means if you have three average wage workers paying taxes to support one average benefit at 42% of the average indexed wage, you need a payroll tax equal to 42% divided by 3 or 14%. When the worker to beneficiary ratio drops to 2.5, you are looking at a much higher payroll tax.

The problem with the 75 year time horizon for solvency has a real problem. One year from now OASI will again be in deficit. Each year that passes will add one more year of deficit while there will be one less year of surplus.

It may be true that it only takes another 1.9 percentage points increase in the OASI payroll tax of 10.6% to 12.5% to sustain OASI for 75 years. However, in year 76 you again fall off the cliff.

Take a look at this table identifying the OASI tax rate needed for a pay-as-go program based on the SSA population projection.

here is the projected beneficiary ratio

Anonymous said...

$2.32/day? That's not much. Why don't we reduce benefits by that amount...